State Chamber of Commerce and Industry v Commonwealth

[1987] HCA 38

HIGH COURT OF AUSTRALIA

Mason C.J., Wilson, Brennan, Deane, Dawson, Toohey and Gaudron JJ.

STATE CHAMBER OF COMMERCE AND INDUSTRY v. THE COMMONWEALTH OF AUSTRALIA

(1987) 163 CLR 329

2 September 1987

Constitutional Law (Cth)

Constitutional Law (Cth)—Powers of the Commonwealth Parliament Taxation—Fringe benefits tax—Whether law with respect to taxation or law to discourage provision of benefits—Whether real connexion required between subject and object of tax—Laws imposing taxation—Validity—More than one subject of taxation—Legislation discriminating against States—Imposition of special burdens or disabilities not imposed on others—Imposition of tax on benefits provided to Commonwealth employees—The Constitution (63 &64 Vict. c.12), s. 51(ii), (xxxvi), (xxxix)—Fringe Benefits Tax Act 1986 (Cth) Fringe Benefits Tax Assessment Act 1986 (Cth)—Fringe Benefits Tax (Application to the Commonwealth) Act 1986 (Cth)—Fringe Benefits Tax (Miscellaneous Provisions) Act 1986 (Cth).

Decisions

MASON C.J., WILSON, DAWSON, TOOHEY AND GAUDRON JJ. In Queensland v. The Commonwealth (1987) 61 ALJR 104; 69 ALR 207 this Court recently held that the Fringe Benefits Tax Act 1986 (Cth) ("the Tax Act") did not impose a tax on property of a State in contravention of the provisions of s.114 of the Constitution. In reaching that conclusion the Court specifically considered the provisions of the Tax Act relating to car fringe benefits and housing fringe benefits. The Court did not then consider the questions raised in the present case which Mason C.J. stated in proceedings brought by the plaintiffs for declarations that the Tax Act, the Fringe Benefits Tax Assessment Act 1986 (Cth) ("the Assessment Act"), the Fringe Benefits Tax (Application to the Commonwealth) Act (1986) ("the Application Act") and the Fringe Benefits Tax (Miscellaneous Provisions) Act 1986 (Cth) ("the Miscellaneous Provisions Act") are invalid.

2. The case states for the determination of the Court the following questions:

(a) Is the Tax Act invalid and ultra vires the Constitution for the reason:

(i) that it deals with more than one subject of taxation contrary to s.55 of the Constitution; or

(ii) that it does not constitute a law with respect to taxation or any other head of legislative power and as such that it constitutes an acquisition of property on other than just terms?

(b) Do the Tax Act, the Assessment Act and the Application Act constitute an indivisible scheme of legislation so that if the Application Act is invalid, the Tax Act and the Assessment Act are also invalid?

(c) If no to (b), have the plaintiffs standing to claim the Application Act is invalid?

(d) Do the plaintiffs have standing to advance as a ground for the invalidity of the Tax Act that, in so far as it purports to impose tax on the States, it is inconsistent with or curtails the continued existence of the States and their capacity to function as independent entities under the Constitution?

(e) If yes to (b) or (c) above, is the Application Act invalid?

(f) If yes to (d) above, is the Tax Act invalid?

3. At the hearing of the stated case a further additional question was added in these terms:

(b) Do the Tax Act, the Assessment Act and the Application Act constitute an indivisible scheme of legislation so that if the Application Act is invalid, the Tax Act and the Assessment Act are also invalid?

(g) If yes to (e) above, is the Tax Act invalid?

4. Questions (c) and (d) are no longer live questions so far as standing is concerned. Since the case was stated the plaintiffs have commenced relator proceedings with the fiat of the Attorney-General for Queensland, challenging the validity of the Application Act and the Tax Act, thereby rendering academic the question whether the plaintiffs had locus standi to challenge the validity of these statutes in the proceedings which they have instituted. However the validity of the Acts remain a live issue.

5. In support of their case for invalidity the plaintiffs make five submissions:

(1) that the Tax Act, when read with the Assessment Act, infringes the provisions of the second paragraph of s.55 of the Constitution, by dealing with more than one subject of taxation;

(2) alternatively, that the Tax Act, when read with the Assessment Act, is wholly or in part not a law with respect to taxation or with respect to any matter upon which the Commonwealth Parliament can legislate and is, accordingly, wholly invalid because, if invalid as to part, the invalid part of the Tax Act is not severable from the rest of the Act;

(3) alternatively, that the Tax Act, when read with the Assessment Act, discriminates against the States or impairs the capacity of each State to function as a government and, as the provisions which operate in this way are inseverable, the Tax Act is wholly invalid;

(4) that the Application Act is neither a law with respect to taxation nor with respect to any other head of Commonwealth legislative power; and

(5) the Application Act is part of an indivisible scheme of legislation so that its invalidity entails the invalidity of the Tax Act and the Assessment Act.

6. The plaintiffs' first submission, based on s.55 of the Constitution, is that the Tax Act, when read with the Assessment Act, deals with a number of different subjects of taxation. According to the plaintiffs, the Tax Act imposes tax on fringe benefits (a) provided by a State to its employees as well as those provided by a private employer to employees; (b) provided to persons who are not employees of the State whilst imposing it on private employers only in respect of benefits provided to persons who are employees; and (c) provided by an employer to employees but also in respect of fringe benefits provided by others to the employer's employees in circumstances where the provision of those benefits by others is not in substance a provision by the employer or to his employees. The plaintiffs also contend that the Tax Act, when read with the Assessment Act, deals with separate categories of fringe benefits, applying different criteria to each as if each is a different subject of taxation. With this conspectus of the plaintiffs' first submission in mind, we turn to s.55 which is material not only to the plaintiffs' first submission but also to their second submission.

Section 55 of the Constitution

7. Undaunted by Sir Owen Dixon's reference to "the hitherto ineffectual menaces" of the section (Moore v. The Commonwealth (1951) 82 CLR 547, at p 569) the plaintiffs rely principally on the second paragraph of the section. The first paragraph requires that a law imposing taxation shall deal only with the imposition of taxation and provides that if the law contains a provision dealing with any other matter, that provision shall be of no effect, the implication being that so much of the law as imposes taxation will be valid (Osborne v. The Commonwealth (1911) 12 CLR 321, at pp 340, 349; Cadbury-Fry-Pascall Pty. Ltd. v. Federal Commissioner of Taxation (1944) 70 CLR 362, at p 372), unless the offending provision cannot be severed: The King v. Barger (1908) 6 CLR 41, at pp 77-78.

8. The first paragraph is related to s.53 of the Constitution which provides that a proposed law imposing taxation shall not originate in the Senate or be amended by the Senate. Without some such provision as contained in that paragraph the practice of tacking would have led to further inroads on the Senate's power of amendment of bills. In the light of ss.53 and 55 the Parliament has adopted the practice of enacting both a Tax Act and an Assessment Act, the former containing the grant of money and imposing taxation, the latter dealing with the means of assessing and collecting the tax, including the imposition of a duty to lodge returns. As Latham C.J. noted in Cadbury-Fry-Pascall, at p.373:

"This practice has been recognized by this Court as carrying out the constitutional provisions upon a correct basis. It has been held on several occasions that various Assessment Acts do not impose taxation, and it has been so held though such Acts contain provisions that a person should be liable to pay tax or be chargeable with tax."

See also Osborne, at pp.336, 349, 355-356, 364-365, 372; Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, at pp 184 et seq., 208, 213; Resch v. Federal Commissioner of Taxation (1942) 66 CLR 198, at p 212.

9. It was the view of Isaacs J. that the provisions of an Assessment Act dealing with collection and recovery of tax, assessments, objections, appeals, offences and penalties were not provisions dealing with the imposition of taxation (The Commonwealth v. Melbourne Harbour Trust Commissioners (1922) 31 CLR 1, at p 14; Munro, at pp 187-192). A contrary view was taken by Higgins and Starke JJ. in Munro, at pp.209, 215-216 and by Latham C.J. in Moore, at p 564; see also Resch, at p 212. In Re Dymond (1959) 101 CLR 11 a majority of the Court vindicated the opinion of Isaacs J. Fullagar J. (with whom Dixon C.J., Kitto and Windeyer JJ. concurred) rejected (at pp.19-21) the argument that the Sales Tax Assessment Act (No. 2) 1930 (Cth) was a law imposing taxation. In the course of so doing, his Honour pointed out (at pp.20-21) that the expressions "imposing taxation" and "dealing with the imposition of taxation" are not precisely synonymous, observing that provisions specifying the persons who are to be liable to taxation and defining their liability are part of the denotation of the term "imposition of taxation", though they do not impose taxation. On the other hand provisions for administration and machinery, the appointment and powers and duties of the Commissioner of Taxation, the making of returns and assessments, the determination of questions of law and fact relating to liability, the collection and recovery of tax and the punishment of offences "deal with" matters other than the imposition of taxation, though they "deal with" taxation (p.21). According to his Honour, at p.21:

"'Dealing with the imposition of taxation' is a different thing from 'dealing with taxation', and the former expression does not mean or include 'dealing with matters incidental to the imposition of taxation'."

10. Adopting the view expounded by Fullagar J., Gibbs C.J., Wilson, Deane and Dawson JJ. in MacCormick v. Federal Commissioner of Taxation (1984) 158 CLR 622, concluded (at p 644) that the Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth) "is not a law imposing taxation and is not subject to the restrictions imposed by s.55: Re Dymond".

11. The second paragraph of s.55 introduces an additional requirement that a law imposing taxation shall deal only with one subject of taxation. Although the second paragraph, unlike the first, does not spell out the consequences of non-compliance, it is difficult to accept as correct the view expressed by Higgins J. in Osborne, at pp.373-374, that the constitutional command is directory only. Barton J.'s opinion in the same case (at pp.352-353) that non-compliance results in total invalidity is to be preferred. As Barton J. noted, at p.353, the purpose of the second paragraph was to prevent "the tacking together of tax Bills of different kinds and unlimited number in one measure", just as the first paragraph was to prevent tacking of extraneous matter to a tax Bill. The point of insisting on a law imposing taxation dealing with one subject of taxation only was to ensure separate consideration by each House of particular kinds of taxation, so that each would be considered on its merits and not just as an element in an overall package of taxes. And, as Barton J. also pointed out (at p.353), partial invalidity confined to the offending provision was not an available option in the case of the second paragraph for there is no means of identifying an offending subject of taxation. His Honour ascribed to the second paragraph an important role in enabling the Senate to protect the people of the States from financial aggression on the part of the Commonwealth.

12. Later in Resch, Dixon J. observed, at pp.222-223:

"The decisions of the Court do not deny that an enactment which offends against the second paragraph of sec.55 of the Constitution is invalid. But they uniformly refuse to give to the words 'one subject of taxation' any narrow or inflexible application.

The purpose of sec.55 was to protect the Senate from any possible abuse of the restriction placed upon it by sec.54, which provides that the Senate may not amend proposed laws imposing taxation. The protection consists in 'guarding the Senate from compulsive acquiescence in one tax by the moral necessity of passing another distinct tax. To secure that end the test is unity of subject matter of taxation in each measure, so that each proposed tax may be fairly considered on its merits' (Harding's Case ((1917) 23 C.L.R. 119, at p.134), per Isaacs J.)."

13. His Honour, after making the point that the expression "subject of taxation" does not presuppose some recognized classification of taxes according to subject-matter, went on to observe that s.55 is not directed to the categories of taxes referred to by economists and lawyers. According to his Honour, at p.223:

"It is concerned with political relations, and must be taken as contemplating broad distinctions between possible subjects of taxation based on common understanding and general conceptions, rather than on any analytical or logical classification."

See also pp 210-211, 213; Harding v. Federal Commissioner of Taxation (1917) 23 CLR 119, at pp 126, 134-136; MacCormick, at pp 651-652.

14. Dixon J. continued:

"The practice of the British legislature and of Dominion and colonial legislatures may serve as a guide in determining whether a provision of a given kind is regarded as falling within a particular subject matter. What is the subject of the tax may be gathered from a general consideration of the enactment or enactments in question, remembering, however, that it is for the legislature to choose its own subject and that its choice is fettered neither by existing nomenclature nor by categories that have been adopted for other purposes."

The test, in deciding whether the subject of taxation imposed by an Act is single, is in our opinion that stated by Isaacs J. in Harding (at p.135), namely whether, "looking at the subject matter which is dealt with as if it were a unit by Parliament, it can then, in the aspect in which it has been so dealt with, be fairly regarded as a unit, or whether it then consists of matters necessarily distinct and separate". In this statement the expression "subject matter" means no more than "subject of taxation".

15. Although the Court is bound to insist on compliance with the requirements of s.55 so that the section achieves its purpose of enabling the Senate to confine its consideration in each case to a taxing statute dealing with a single subject of taxation, in applying the test stated above, the Court will naturally give weight to the Parliament's understanding that its Tax Act deals with one subject of taxation only. This is because the application of the test involves what is in substance a question of fact or value judgment. The Court should not resolve such a question against the Parliament's understanding with the consequence that the statute is constitutionally invalid, unless the answer is clear. See National Trustees, Executors and Agency Co. of Australasia Ltd. v. Federal Commissioner of Taxation (1916) 22 CLR 367, at pp 378-379; Harding, at pp 134-136; Resch, at p 211.

16. The plaintiffs contend that, when the test stated by Isaacs J. is applied, it is seen that the principal subject of the tax imposed by the Tax Act, as read with the Assessment Act, is fringe benefits provided by private employers to employees. It then follows, so the argument runs, that to the extent to which the Tax Act, when so read, imposes a liability to taxation in respect of benefits otherwise provided, the Tax Act deals with more than one subject of taxation.

17. Section 5 of the Tax Act imposes tax in respect of the fringe benefits taxable amount of an employer in a year of tax. But, in accordance with long-standing Parliamentary practice, it is the Assessment Act, not the Tax Act, that specifies the person who is liable to pay the tax and defines the circumstances in which liability to pay tax arises. For this reason s.3 of the Tax Act provides that the Assessment Act is incorporated with and shall be read as one with the Tax Act. The effect of this provision is that the Tax Act is to be read in the light of the definitions contained in the Assessment Act and of the provisions contained in that Act with respect to the specification of the persons who are to be liable to taxation and of the circumstances in which they are subjected to liability (Moore, at p.565). Accordingly, in deciding what is the relevant subject of taxation under the Tax Act and whether it imposes taxation on more than one subject of taxation, it is necessary for us to look to the relevant sections of the Assessment Act.

18. The relevant provisions of the Assessment Act begin with the definitions of "fringe benefits taxable amount", "fringe benefit" and "benefit" in s.136. These definitions constitute the foundation of the taxation regime as it affects private employers. The expression "fringe benefits taxable amount" is defined so as to mean:

"... in relation to an employer in relation to a year of tax ... the sum of the taxable values, in relation to the year of tax, of all the fringe benefits in relation to the employer in relation to the year of tax."

19. The expression "fringe benefit" means:

"... in relation to an employee, in relation to the employer of the employee, in relation to a year of tax ... a benefit -

(a) provided at any time during the year of tax; or

(b) deemed to be provided in respect of the year of tax,

being a benefit provided, or originally provided, as the case may be, to the employee or to an associate of the employee by -

(c) the employer;

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the 'arranger') other than the employer or an associate of the employer under an arrangement between -

(i) the employer or an associate of the employer; and

(ii) the arranger or another person,

in respect of the employment of the employee ..."

The definition then goes on to exclude from its operation a number of payments and receipts which are not material for present purposes. The word "benefit" is defined so as to include:

"... any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under -

(a) an arrangement for or in relation to -

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money ..."

20. These definitions, particularly that of "fringe benefit", indicate that the tax is imposed not only in respect of benefits provided by an employer to an employee, but also in respect of benefits provided by an associate of an employer to the employee, by an employer to an associate of the employee, by an associate of the employer to an associate of the employee and by an arranger in the circumstances mentioned in the definition of "fringe benefit". However, it is necessary to take note of other definitions in s.136 in order to ascertain more precisely the range of benefits provision of which is subjected to taxation by the Tax Act.

21. The word "associate" is defined in s.136 so as to have the same meaning in relation to a person as the expression has in relation to a person in s.26AAB of the Income Tax Assessment Act 1936 (Cth). There the word in its application to a taxpayer who is a natural person is defined as meaning "a relative of the taxpayer". This definition has to be read in conjunction with a definition of the word "relative" in the Income Tax Assessment Act which gives that word an extended meaning in relation to a natural person so as to include ancestors and descendants of the person concerned as well as his or her spouse and the spouse of any person falling within the extended class. The definition of "associate" in s.26AAB also includes a partner of a taxpayer, a spouse or child of a partner, a trustee of a trust estate which is a taxpayer and a range of other persons in the case of a taxpayer company.

22. The word "employee" is defined in s.136 so as to mean a current, future and former employee. "Employer" has a corresponding meaning, but the definition excludes the Commonwealth or an authority of the Commonwealth that cannot, by a law of the Commonwealth, be made liable to taxation by the Commonwealth. "Current employee" means:

"... an employee within the meaning of Division 2 of Part VI of the Income Tax Assessment Act 1936 and, whether or not the Governor-General has entered into an arrangement in accordance with section 221B of that Act with the Governor in Council of the State concerned, includes a member of the Parliament of a State and a person employed by a State or by an authority of a State ..."

23. Section 221A(1) of the Income Tax Assessment Act defines "employee" as meaning:

"... a person who receives, or is entitled to receive, salary or wages, and -

(a) includes a member of the Parliament and a person employed by the Commonwealth or by an authority of the Commonwealth;

(b) where the Governor-General has entered into an arrangement with the Governor in Council of a State in accordance with section 221B, subject to the terms of the arrangement, includes a member of the Parliament of that State and a person employed by that State or by an authority of that State ..."

24. There is also the definition of "employment" in s.136 of the Assessment Act which, in relation to a person,

"... includes the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee ..."

25. These definitions are significant in two respects. First, and this is adverse to the plaintiffs' argument, the definitions of "employee" in s.221A(1) of the Income Tax Assessment Act and "employment" in the Assessment Act, read together, suggest that, when the Assessment Act refers to employment, it is not confining itself to the traditional relationship of master and servant but is ranging more widely so as to include others whose relationship is constituted by the payment and receipt of salary or wages. Certainly it embraces members of a State Parliament and possibly other office holders of a State who would not otherwise be classified as employees. The inclusion of State judges and, perhaps, State ministers of the Crown, is not clear, there being no specific reference to them, but for the purpose of dealing with the plaintiffs' argument we are content to assume that they are persons employed by a State within the meaning of the definition of "employee" in s.221A(1).

26. Secondly, and this is a matter of significance for the plaintiffs' argument, the fringe benefits tax is payable by an employer, not only in respect of the benefits which he provides to his employees, but also in respect of benefits provided by others, in some instances at least to persons other than an employee of the employer in circumstances in which the employer may be unaware that any benefit is provided and over the provision of which he may have no control. But to say this is to fall well short of acknowledging that the tax is imposed on more than one subject of taxation. What the plaintiffs have to demonstrate in order to make good their argument is that taxation is imposed on an employer in respect of benefits which he provides to his employee as one subject of taxation and that the employer is taxed in respect of provision of other benefits as another subject or other subjects of taxation. The plaintiffs seek to achieve this goal with the assertion that fringe benefits are commonly understood to be benefits, in addition to salary and wages, provided by employer to employee and that in the context of a fringe benefits tax it is the notion of fringe benefits as so understood that is a distinct and separate subject of taxation.

27. The answer to this submission is that the common understanding of fringe benefits is neither as narrow nor as precise as the plaintiffs suggest. The definition of "fringe benefit" supplied by The Macquarie Dictionary (1981) indicates that the common understanding of the expression is not confined to benefits provided by an employer to his employee and that it extends to benefits which are related to employment whether or not they are provided by the employer. The statutory definition of "fringe benefit" gives effect to this understanding by specifically defining the benefit as one provided "in respect of the employment".

28. The plaintiffs endeavour to counter this aspect of the definition by pointing to s.148(1) of the Assessment Act, the effect of which is to identify a number of matters which might in some circumstances be thought to derogate from the notion that a benefit is provided in respect of employment. The sub-section provides that a reference in the Assessment Act to the provision of a benefit to a person in respect of the employment of an employee is a reference to the provision of such a benefit, whether or not the matters mentioned in the sub-section are present. For present purposes it will be sufficient to mention four of the matters referred to in the sub-section. They are:

" ...

(c) whether or not the benefit is surplus to the needs or wants of the recipient;

(d) whether or not the benefit is also provided to another person;

(e) whether or not the benefit is, to any extent, offset by any inconvenience or disadvantage;

...

(h) whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee."

29. The plaintiffs suggest that the effect of s.148 is to make the connection between the provision of a fringe benefit and employment tenuous in the extreme. Certainly the effect of the section is that a broad connection will suffice. But this is not to destroy or dispense with the requirement that the benefit must be employment related. The plaintiffs also rely on the broad statutory definition of the expression "in respect of" which is contained in s.136, namely:

"... in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment ..."

Again, the effect of this definition is to broaden the range of connections that will satisfy the necessary relationship between the provision of a fringe benefit and the employment, but it leaves the requirement for such a relationship in existence.

30. The foregoing survey of the legislative provisions is destructive of any idea that Parliament has sought to impose a tax on fringe benefits provided by an employer to an employee and has then sought to impose tax on a separate subject or separate subjects of taxation outside that area. Clearly enough the legislation has been framed on the footing that there is but a single subject of taxation, formulated according to a broad conception of what constitutes fringe benefits. That conception embraces benefits, not being salary or wages, referable to the employment relationship, whether provided by the employer or not and whether received by the employee or not. So understood the legislation presented for the consideration of each House of the Parliament a "unity of subject matter" rather than distinct and separate subjects of taxation.

31. To say this is to reject the central thrust of the plaintiffs' case on this issue because their submission is that the main subject of taxation is the provision of fringe benefits by a private employer to an employee and that the imposition of tax on other fringe benefits necessarily constitutes a different subject of taxation. In this respect the plaintiffs rely on the statement in the joint judgment of Mason, Brennan and Deane JJ. in Queensland v. The Commonwealth, at p 112; p 223 of ALR, that the tax "is levied on employers in respect of the fringe benefits which they provide to employees". Wilson and Dawson JJ. referred to the tax in similar terms and Gibbs C.J., at p.109; p.218 of A.L.R., described the tax "on the provision of the benefits by associates or arrangers" as incidental. But these statements were not directed to the point now under consideration and were broadly descriptive of the operation of the legislation only for the purpose of determining the question which arose in that case.

32. It may well be, as the plaintiffs suggest, that the definitions in the Assessment Act are so far-reaching that they are arbitrary and oppressive in their operation in the sense that an employer is subjected to liability in circumstances beyond his knowledge and control. Nevertheless this does not mean that tax is imposed on more than one subject of taxation. Underlying the width of the definitions and the incidental provisions, such as s.148(1), is the evident intention to ensure that tax is effectively imposed on a very wide range of employment-related benefits. And even if the legislative provisions are capable of operating in some particular situations where the benefit provided or received has only an indirect or somewhat remote connection with the employment relationship, this is not enough in itself to stamp the relevant provisions with the character of dealing with another subject or other subjects of taxation. It was open to the Parliament, in seeking to impose an effective and comprehensive fringe benefits tax, to select the employer as the person liable to pay the tax. The employer is the person who ordinarily provides the benefit and stands to gain from its provision to his employee. In the ultimate analysis, the fact that the employer is liable in some situations to pay tax on benefits provided by others to persons who are not his employees, without his having any right of recoupment, does not affect the characterization of the subject of taxation.

33. In order to bring into operation the second paragraph of s.55 of the Constitution the plaintiffs must show that the legislation operates in such a way as to deal with a "necessarily distinct and separate" subject of taxation, to use the words of Isaacs J. in Harding (at p.135). Far from the plaintiffs demonstrating that the legislation operates in this way, what emerges is that the legislation, including the provisions on which the plaintiffs rely, may be fairly regarded as a tax on fringe benefits as a single subject of taxation. The plaintiffs have some difficulty in characterizing the several subjects of taxation which, on their argument, are imposed by the legislation. They do not suggest that there is a gift duty or tax in addition to a fringe benefits tax. Rather, they seem to say, there are several kinds of fringe benefits tax imposed. It is not to the point that, as a matter of legal analysis, the operation of the tax in one situation may be distinguished from its operation in another situation, so that in one case the tax operates on the provision of a benefit by employer to employee and in another case on the provision by someone other than the employer to someone other than the employee. In selecting a single subject of taxation the Parliament may prefer substance to form, as it did in s.39 of the Land Tax Assessment Act 1910 (Cth) when it validly imposed land tax not only on land owners but also on the shareholders of a company in respect of land owned by the company: Morgan v. Deputy Federal Commissioner of Land Tax, N.S.W. (1912) 15 CLR 661, at pp 665-666.

34. In any event the provisions of the Assessment Act relating to "associates" and provisions such as s.148(1) may be regarded as anti-avoidance provisions, without which the main thrust of an employment-related fringe benefits tax might easily be avoided. So regarded, the provisions do not detract from the character of the Tax Act as a statute which imposes one subject of taxation. True it is that these provisions are different in kind from s.67 of the Assessment Act which enables the Commissioner to determine that a fringe benefits taxable amount be increased where an arrangement has been entered into for the sole or dominant purpose of enabling an employer to obtain a tax benefit. Section 67 is a more typical avoidance provision. Nonetheless the purpose of the provisions mentioned earlier is to ensure the effectiveness of a broadly based fringe benefits tax.

35. As Dixon J. observed in Resch (at p.223), once the main or substantial subject of the tax has been ascertained:

"... then the question whether particular provisions directed at defining or widening the area or incidence of the tax or the liability to it or preventing avoidance or evasion or facilitating collection have in truth introduced a new or second subject must be determined by considering their natural connection with or relevance to the main subject."

See also Waterhouse v. Deputy Federal Commissioner of Land Tax, S.A. (1914) 17 CLR 665, at pp 674, 677-678, 678-679; National Trustees, at pp 376, 379-380; British Imperial Oil Co. Ltd. v. Federal Commissioner of Taxation (1925) 35 CLR 422, at pp 434, 443-444.

36. The fact that the Assessment Act binds the States (s.4), as well as private employers, and taxes them in their capacity as employers as part of a general regime of imposing tax on employers generally does not in any way detract from what we have already said. For the purposes of classification under s.55 of the Constitution a tax with more than one object may nevertheless deal only with one subject of taxation: Osborne, at pp.372-373; Federal Commissioner of Taxation v. Hipsleys Ltd. (1926) 38 CLR 219, at pp 236-237; Colonial Gas Association Ltd. v. Federal Commissioner of Taxation (1934) 51 CLR 172, at pp 180-181, 188-189.

37. However, the provisions of the Assessment Act, to the extent to which they seek to impose tax on a State in respect of its judges, members of Parliament and ministers require separate consideration. The plaintiffs submit that the definition of "current employee", when read with the definition of "employment" includes judges and ministers, as well as members of Parliament. Yet, so the argument goes, neither members of Parliament, nor judges, nor ministers, are employees of a State.

38. The definition of "current employee" in s.136 of the Assessment Act incorporates, with one modification, the definition of "employee" in s.221A(1) of the Income Tax Assessment Act. The latter defines an employee as a person who receives or is entitled to receive salary or wages and goes on to include a member of a State Parliament and a person employed by a State or by an authority of a State where the Governor-General has entered into an arrangement with the Governor in Council of that State. The one modification of that definition which is made in the Assessment Act is the elimination, in relation to the inclusion of a member of a State Parliament or an employee of a State or of a State authority, of the requirement that there be an arrangement between the Governor-General and the Governor in Council of that State.

39. The definition of "employee" in s.221A(1) must be construed in accordance with the definition in the same sub-section of "salary or wages". This is defined as meaning "salary, wages, commission, bonuses or allowances paid ... to an employee as such ..." The definition goes on to include a number of specific payments of various types. The words "paid ... to an employee as such" are difficult to construe. They are clearly intended to operate as words of limitation and for that reason, if for no other, cannot simply be construed by reference back to the definition of "employee". That would involve a circularity which would deprive the words of any meaning. Rather, the words indicate that the payments referred to are those made to the recipient in connection with and by reason of his service as an employee. Whether or not "an employee as such" must be confined to an employee in a master and servant relationship in the strict legal sense is something upon which we need express no view. It is sufficient for present purposes to say that clearly within the meaning of the Assessment Act, "employee" includes a member of the Parliament of a State and a person employed by a State or by an authority of a State. Whether the reference to a person employed by a State or by an authority of a State requires employment in the generally understood sense or whether it extends to certain office holders such as ministers of State or judges is likewise not clear. We are content to assume for the purposes of argument that the reference does extend as far as that. Such an assumption is at least consistent with the definition of "employment" in s.136 of the Assessment Act which includes, in relation to a person, the performance of any functions or duties etc. "that results ... in the person being treated as an employee". That formulation clearly extends employment beyond the limits within which it might otherwise be confined. Of course, the definition of "current employee" is given without reference to the definition of "employment" and there is no requirement that it be construed in a corresponding sense. The definition of "employment" can, therefore, only afford assistance in the general sense that it may be presumed that Parliament intended its legislation to operate in a consistent manner. Even making the assumptions which we do, the concept of an employee is extended only because of the inclusion of persons in receipt of payment for their labours who are engaged in a relationship which is not significantly different from that of master and servant, having regard to the object and scope of the legislation. Once this is appreciated, there is no sound basis for so holding that the fringe benefits tax imposed on a State in respect of benefits provided to judges, members of Parliament and ministers constitutes a distinct and separate subject of taxation. As a matter of common understanding the tax imposed on a State in respect of benefits provided to such persons would not be regarded otherwise than as an aspect of a comprehensive fringe benefits tax.

Section 51(ii) of the Constitution

40. The plaintiffs' first submission on this aspect of the case is that the Act and the Assessment Act are laws to discourage the provision of fringe benefits, not laws with respect to taxation. In support of this submission they rely on a statement made by Menzies J. in Fairfax v. Federal Commissioner of Taxation (1965) 114 CLR 1, where his Honour said, at pp 17-18:

"There may be laws ostensibly imposing tax which, nevertheless, are not laws with respect to taxation. For example, a special prohibitive tax upon income derived from the sale of heroin or from the growing or treatment of poppies for the production of heroin may not be a law with respect to taxation but rather a law made for the suppression of the trade in that drug by imposing penalties described as taxes for participation in it. The reason for denying to such a law the character of a law with respect to taxation would not be either its economic consequences or the motive behind its enactment. It would simply be that its true character is not a law with respect to taxation."

41. We make three comments about this statement. First, it does not explain how the true character of the hypothetical law as a law for the suppression of the noxious trade, rather than a law with respect to taxation, is determined. Secondly, to the extent to which his Honour regarded the existence of a "prohibitive" tax as a decisive element in reaching his suggested conclusion, it is an element that is absent in the present case. Our final comment is that the illustration scarcely stands well with the principle on which Kitto, Taylor and Windeyer JJ. decided the case, a principle applied by Kitto J., at p.13:

"The legislative policy is obvious and may be freely acknowledged: it is to provide trustees of superannuation funds with strong inducement to invest sufficiently in Commonwealth and other public securities. The raising of revenue may be of secondary concern. But the enactment does not prescribe or forbid conduct. Its character is neither fully nor fairly described by saying that it makes trustees of superannuation funds liable to pay for failing to do what the legislature wishes. To adapt the language of Higgins J. in R. v. Barger the substance of the enactment is the obligation which it imposes, and the only obligation imposed is to pay income tax. In substance as in form, therefore, the section is a law with respect to taxation."

See also pp.16, 19. The principle implicit in this passage has been applied by the Court in later cases. In characterizing a law the Court has regard to its operation, to what the law does in the way of creating rights and obligations, and how it operates within the permitted area of power. It matters not that the provisions which so operate may be intended to achieve some other purpose: Melbourne Corporation v. The Commonwealth (1947) 74 CLR 31, at p 79; Murphyores Incorporated Pty. Ltd. v. The Commonwealth (1976) 136 CLR 1, at pp 11-12, 19-23; Actors and Announcers Equity Association v. Fontana Films Pty. Ltd. (1982) 150 CLR 169, at pp 193, 201-203; Queensland Electricity Commission v. The Commonwealth (1985) 159 CLR 192, at p 215. Here the legislation operates so as to impose tax and define the extent of the liability to tax.

42. The plaintiffs' second submission on this branch of the case is that the legislation is not a law with respect to taxation and that it is a law for the acquisition of property otherwise than on just terms. The foundation for this submission is the suggestion that there must be a connection, a real connection, between the subject and the object of the tax as an essential condition of a valid exercise of the taxation power. In MacCormick Gibbs C.J., Wilson, Deane and Dawson JJ. (at p.636) doubted this proposition and Brennan J. (at pp.654-655) rejected it. Subsequently in Deputy Commissioner of Taxation v. Truhold Benefit Pty. Ltd. (1985) 158 CLR 678, at p 686, the Court impliedly rejected the proposition when it said:

"The tax imposed is none the less a tax even although it may operate harshly upon those who in fact received little or no benefit from the transaction ..."

It is certainly difficult to see why such a connection is essential to an exercise of the taxation power. And it is impossible to conclude that the proposition is correct when it is applied to provisions, such as those which impose tax on benefits provided by and to associates, whose validity is sustained on the footing that they are integral as anti-avoidance measures to make the tax effective. In any event, the required connection is to be found in the present legislation in the provision of a benefit to a person in respect of his employment.

The Implied Prohibition - Discriminating Against the States

43. The plaintiffs' case under this head is that the Tax Act discriminates against the States or singles them out for special treatment or, alternatively, that the law interferes with, impairs or curtails the States in the exercise of their functions of government. The plaintiffs accept that the relevant principles are correctly stated in Queensland Electricity Commission. They do not seek to re-argue Victoria v. The Commonwealth (the "Pay-roll Tax Case") (1971) 122 CLR 353.

44. According to the plaintiffs, the legislation singles out the States for special treatment. This, so it is said, is because the legislation is aimed or directed at the States, requiring them to pay tax in respect of benefits provided to State ministers, members of Parliament and judges, with whom the State has no subsisting employment relationship such as subsists between private employers and their employees. In this respect the obligation imposed upon a State is peculiar to it and has no counterpart in the tax which is imposed on private employers in respect of benefits provided to their employees. The result, so it is said, is to reduce the range of choices available to the State and thereby to reduce its capacity to make its own decisions in the exercise of its governmental functions (Queensland Electricity Commission, at p.262) on a matter of high importance to the State, namely the terms of remuneration payable to its highest functionaries. According to the argument, the case therefore falls within the principle enunciated by Dixon J. in Melbourne Corporation, at p.81:

"All agree, however, that a tax cannot be laid on the States 'as such,' that a State cannot be singled out for taxation or for a special burden of taxation in respect of acts or things when others are not taxed or are not so burdened in respect of the same acts or things, in other words, that a taxing law discriminating against a State is unconstitutional and void."

45. The flaw in this, as in the other arguments already rejected, is that it takes as its starting point the premise that the subject-matter of the legislation is a tax imposed on private employers in respect of fringe benefits provided in connection with a master and servant employment relationship. As we have pointed out, in some cases the tax is specifically imposed on the provision of benefits in connection with a relationship which is not that of master and servant but is constituted by the payment and receipt of salary or wages. It is the receipt of benefits in addition to salary or wages which the legislation makes crucial and not the existence of a strict master and servant relationship. So much is indicated by the definition of "employment" in the Assessment Act. That being so, there is no singling out of the States or discrimination against them by imposing tax upon them in respect of benefits provided to members of Parliament or other office holders in receipt of salaries or, if such be included, ministers of State or judges. Far from isolating the States for special treatment in the form of a special burden or disability, the legislation subjects them, in common with others who pay salary or wages, to liability to pay tax on fringe benefits as part of a comprehensive fringe benefits tax.

46. The alternative contention that the legislation interferes with, impairs or curtails the States in the exercise of their functions of government rests on the view that anything which inhibits a State in establishing the terms and conditions upon which the persons who constitute the organs of government shall be remunerated is an interference with the capacity of the State to govern. The short answer is that the States are subject to the Commonwealth Parliament's exercise of the taxation power; they have no immunity from Commonwealth taxation (the Pay-roll Tax Case). And, as it is accepted that the imposition of income tax on the salaries of State ministers, members of Parliament and judges is not an infringement of any implied prohibition under the Constitution, it must follow that the imposition of a tax on the States in respect of fringe benefits provided by the States to such persons as part of a general fringe benefits tax on those who pay salaries and wages is not an infringement of the implied prohibition.

The Application Act

47. The Application Act is, as its long title indicates, an Act to provide for the notional application of fringe benefits tax in relation to benefits provided in respect of the employment of Commonwealth employees. Section 4 provides that, subject to certain modifications, the Assessment Act applies in relation to Commonwealth employment. Section 7 enables the Minister of Finance to give such directions in writing as are necessary or convenient to be given for carrying out or giving effect to the Application Act and, in particular, may give directions in relation to the transfer of money within the Public Accounts.

48. The plaintiffs' submission that the Application Act cannot be supported as an exercise of either the taxation power or the express incidental power operating in combination therewith is not to the point.

49. The Constitution established a new body politic, the Commonwealth of Australia. The body politic was armed with specific legislative, executive and judicial powers. However, the establishment and the nature of the body politic gave rise also to certain implied powers, as explained by Dixon J. (as he then was) in Burns v. Ransley (1949) 79 CLR 101, at p 116; The King v. Sharkey (1949) 79 CLR 121, at pp 148-149, and Australian Communist Party v. The Commonwealth (1951) 83 CLR 1, at p 188. Subject to constitutional prohibitions, express or implied, the implied powers include a power for the regulation and supervision of the polity's own activities, the exercise of its powers and the assertion or waiver of its immunities.

50. The Application Act is a law for the regulation and supervision of the provision of fringe benefits by Commonwealth Departments and Authorities to Commonwealth employees, and as such is a law which the power to enact is necessarily implied from the establishment and nature of the Commonwealth of Australia. It may also be supported as an exercise of the express incidental power in s.51(xxxix) in combination with other constitutional provisions.

51. But in any event the invalidity of the Application Act, if it could be established, would not lead to the invalidity of the Tax Act and the Assessment Act. The operation of the Tax Act and the Assessment Act is not expressed to be conditional on the operation of the Application Act: Deputy Federal Commissioner of Taxation (N.S.W.) v. WR Moran Pty. Ltd. (1939) 61 CLR 735, at pp 762, 772; Logan Downs Pty. Ltd. v. Federal Commissioner of Taxation (1965) 112 CLR 177, at pp 187, 190. Moreover, the Tax Act, the Assessment Act and the Application Act do not form interdependent elements in a general scheme because the rights and liabilities created by the first two statutes are not related to the operation of the Application Act: W.R. Moran Pty. Ltd., at pp 762, 772; South Australia v. The Commonwealth (the "First Uniform Tax Case") (1942) 65 CLR 373, at pp 411, 447-448, 456, 462. The plaintiffs relied on statements in Hansard made with reference to the Application Act with a view to showing that the three Acts form part of a general interdependent scheme. The statements do not go that far and, even if they did, they provide no basis for giving the statutes an interpretation which finds no support at all in their language.

52. In the result we would answer the questions asked in the following way. We do so in order to give effect to the submissions put to the Court on behalf of the parties. Taken literally, questions (e) and (f) relate to standing, a matter that had ceased to be live when the hearing began.

(a) (i) No. (ii) No.

(b) No.

(c) Unnecessary to answer.

(d) Unnecessary to answer.

(e) The Application Act is valid.

(f) The Tax Act is valid.

(g) Does not arise.

BRENNAN J. I agree with the reasons for judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. except in one respect. I would hold that the Fringe Benefits Tax Act 1986 (Cth) ("the Tax Act") and the Fringe Benefits Tax Assessment Act 1986 (Cth) ("the Assessment Act") do not validly impose tax on a State in respect of so much of the fringe benefits taxable amount of a State as represents the value of fringe benefits provided in respect of the "employment" of members of the State Parliament, Ministers of the Crown and Judges of the State Supreme Court. It may be that on the true construction of the definition of "employee" in s.136 of the Assessment Act, the value of fringe benefits provided in respect of the "employment" of State Judges or any State Ministers of the Crown who are not members of the State Parliament is not included in the fringe benefits taxable amount of the State. The judgment of Deane J. states the difficulty in the way of including that value. However, I do not find it necessary to decide the point for I would rest my conclusion on a different principle. The relevant principle, implied in the Constitution, is that a law of the Commonwealth cannot unduly impair the capacity of a State to perform its constitutional functions. The implication of a prohibition of this kind in the Constitution has long been recognized, though its formulation has not been uniform and its scope uncertain: Melbourne Corporation v. The Commonwealth (1947) 74 CLR 31, at pp 66,75,80,99; Bank of N.S.W. v. The Commonwealth (1948) 76 CLR 1, at pp 242-243,325-326, 338; Victoria v. The Commonwealth ("the Payroll Tax Case") (1971) 122 CLR 353, at pp 392,403,411,424; Victoria v. Australian Building Construction Employees' and Builders Labourers' Federation (1982) 152 CLR 25, at p 93; Koowarta v. Bjelke-Petersen (1982) 153 CLR 168, at pp 191-192,216, 225-226,240; The Commonwealth v. Tasmania ("the Tasmanian Dam Case") (1983) 158 CLR 1, at pp 128,212-214,281; Queensland Electricity Commission v. The Commonwealth (1985) 159 CLR 192, at pp 206,217,222,231,247,260. The principle, however it is stated, is to be distinguished from a complementary but different principle recently considered in Queensland Electricity Commission v. The Commonwealth, namely, that a law of the Commonwealth cannot discriminate against a State unless the power under which the law is made authorizes the discrimination.

2. In this case, the Acts are general in their application. They do not discriminate against the States (except, perhaps, in reference to members of a State Parliament who are included in the definition of "current employee" though they might not otherwise fall within that category). But if the Acts sweep into the general net of taxation the value of the fringe benefits provided in respect of the "employment" of the State officers mentioned, a tax is imposed on the States in respect of the emoluments provided to their essential functionaries. As Dixon J. pointed out in Melbourne Corporation, at p.80, most of the legislative powers assigned to the Commonwealth would not support a law which offends the implied prohibition against unduly impairing the capacity of a State to perform its constitutional functions, but the tax power is an exception. His Honour noted:

" ... to attempt to burden the exercise of State functions by means of the power to tax needs no ingenuity, and that, no doubt, is why that power occupies such a conspicuous place in the long history both in the United States and here of the question how far federal power may be used to interfere with the States in the exercise of their powers."

Attempts to answer the question how far federal taxing power may validly burden the exercise of State functions have not yielded in this country a general criterion which distinguishes between those taxes to which a State is subject and those from which it is immune. In America, the problem was considered in New York v. United States (1946) 326 US 572, a case to which reference has been made in this Court. It was a case where a federal tax was imposed on a State in respect of activities in which the State had engaged in exercise of its powers. A suggested criterion for determining whether the State was immune from the tax was the governmental character of the power which the State was exercising, but that criterion proved too elusive. In the leading opinion, Frankfurter J. said, at p.581:

" Any implied limitation upon the supremacy of the federal power to levy a tax like that now before us, in the absence of discrimination against State activities, brings fiscal and political factors into play. The problem cannot escape issues that do not lend themselves to judgment by criteria and methods of reasoning that are within the professional training and special competence of judges."

The principle expressed by Stone C.J., with the concurrence of Reed, Murphy and Burton JJ., was that a tax, though non-discriminatory, should not "interfere unduly with the State's performance of its sovereign functions of government": see pp.587,588. As Latham C.J. observed in Melbourne Corporation, at p.60, "this statement of principle renders it necessary to distinguish between the 'sovereign functions of Government' performed by a State and other functions assumed and performed by it".

3. A distinction between essential and inessential functions of government for the purpose of determining the tax immunity of a State has not been recognized as valid in this Court in modern times (see per Gibbs J. in the Payroll Tax Case, at p.424) and, in the United States, a similar distinction - between "governmental" and "proprietary" functions - was abandoned as untenable and unworkable: see the discussion in Garcia v. San Antonio Metro (1985) 469 US 528, at pp 542-543. The criterion of "undue" interference has also proved to be insufficiently precise for application under our Constitution, for we have not adopted the doctrine which Stone C.J. espoused in New York v. United States (at p 589) that the tax immunity "be so construed as to allow to each government reasonable scope for its taxing power". In the Payroll Tax Case Walsh J., while acknowledging that there was some implied limitation on the power of the Commonwealth Parliament to affect the States by a law imposing taxation, said (at pp.410-411):

" I have said above that the limitations have been described in various ways. Some of these descriptions have been in terms which, in my opinion, do not provide satisfactory tests for determining whether or not a law is valid. For example, a statement that a law is invalid if it subjects the governmental functions of a State to 'undue interference' provides no satisfactory means for determining what is 'undue'. Again there are difficulties in a test which makes the decision of a legal question depend upon a distinction made by the Court between functions of governments which are 'normal' or are 'essential' and those which are not."

Barwick C.J. rejected the approach of implied limitations on the federal taxing power. Noting that "States and their functions are not matters committed to the Parliament", his Honour's approach was to determine the validity of an impugned law by ascertaining its true character and subject matter. The supposed implied limitation was, in his Honour's view, too imprecise:

" ... the concept of an 'undue' interference with State functions attracting invalidity provides but a question begging formula. And to attempt to use a distinction between governmental and other functions of a State in the modern world as a legal criterion of validity is, in my opinion, without promise. New York v. United States, to my mind, illustrates the difficulties without affording any sure guide to their resolution." (At pp 382-383.)

Owen J. agreed with the Chief Justice and McTiernan J. adopted a somewhat similar approach.

4. It is not surprising that the Payroll Tax Case was decided without the enunciation of a general criterion by reference to which the immunity of a State from a general federal tax might be determined. Menzies J. (at p.392) declined to offer "an exhaustive formulation". Windeyer J. (at p.403), accepting that implied limitations might restrict the Parliament's exercise of its powers, upheld the tax because it was not "directed to the States to prevent their carrying out their functions as parts of the Commonwealth". Walsh J. (at p.413) accepted that a non-discriminatory taxing law affecting the States might be beyond power but did not regard the laws there under challenge as impermissibly affecting the capacity of the States to carry out their functions. Gibbs J. (at p.424) said that a "general law of the Commonwealth which would prevent a State from continuing to exist and function as such would in my opinion be invalid". His Honour did not regard the laws there under challenge as infringing any implied prohibition, however the prohibition might be framed. I shall presently return to his Honour's reasons for holding the payroll tax to have been validly imposed.

(e) If yes to (b) or (c) above, is the Application Act invalid? The Application Act is valid.

(f) If yes to (d) above, is the Tax Act valid. The Tax Act is valid.

(g) If yes to (e) above, is the Tax Act invalid? Does not arise.

Order that the plaintiffs pay the defendant's costs.